Congress' Democratic Leaders Support Loan Plan

BY MARCY GORDON | AP Business Writer

WASHINGTON (AP) - Democratic leaders in Congress on Tuesday threw their weight behind a proposal to use $24 billion in government funds to help struggling borrowers, a move opposed by the Bush administration.

The Federal Deposit Insurance Corp. broke with the administration last week and proposed using $24 billion in federal bailout money to help 1.5 million borrowers avoid foreclosure by guaranteeing modified home loans through the end of next year.

FDIC Chairman Sheila Bair, appearing at a House hearing, pressed again for more aggressive government action to help millions of home borrowers avert foreclosure, saying it is needed to ensure economic recovery.

"As foreclosures escalate, we are clearly falling behind the curve," Bair told the House Financial Services Committee. "Much more aggressive intervention is needed if we are to curb the damage to our neighborhoods and broader economic health."

With Democrats strongly supporting Bair, who is an independent regulator, a sharp divide has been established between them and the lame-duck administration on a burning issue of economic distress.

Rep. Barney Frank, chairman of the House committee, said "it is essential" to use some of the money in the $700 billion financial rescue program – of which $250 billion is going to inject capital into banks – to stem the tide of foreclosures.

"The solutions to the problem at the root of our economic crisis – aggressively addressing home foreclosures – have been known for some time," Pelosi said in a statement. "Further delay in implementing these solutions is unacceptable."

Lawmakers' dissatisfaction is significant because Congress can impose new conditions on the use of the bailout money. Democrats are pushing for money both to help the ailing auto industry and distressed homeowners – though legislative action appears unlikely before the administration of President-elect Barack Obama is installed in mid-January.

Paulson, also testifying at the hearing Tuesday and facing Democrats' impatience over mortgage distress, reaffirmed opposition to using bailout money to provide guarantees for home loans at risk of falling into default.

"We've been working very, very aggressively at helping" struggling homeowners, Paulson said. He cited a program the government announced last week in which borrowers with loans owned or guaranteed by mortgage giants Fannie Mae and Freddie Mac would get reduced interest rates or longer terms to make their payments more affordable.

Critics, including Bair, said that plan fell short of what is needed.

"It is nobody's view that we have been as successful as we need to be in reducing foreclosures," Frank told Paulson.

"I am going to keep working on this and looking at ways to use taxpayer money" appropriately, Paulson pledged.

Under the FDIC's new plan, the government would guarantee 2.2 million modified mortgages – mainly high-risk loans made to borrowers with weak credit or small down payments – through the end of 2009. The agency says the government's backing would make the lending industry more willing to modify home loans because taxpayers would absorb half the losses if the borrower defaults a second time.

Also, loan servicing companies, which collect and distribute mortgage payments, would be paid $1,000 for each loan they modify.

Even if a third of borrowers default again on their modified loans, 1.5 million homes would still be saved, the FDIC says. Under the agency's plan, monthly payments shouldn't total more than 31 percent of homeowners' pretax monthly income.

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